State Banking in Early America: A New Economic History (review)

For a long time, financial history was an intellectual backwater. With few exceptions, most of the early work in cliometrics focused on the "real" side of the economy. Over the last two decades or so, however, financial history has grown by leaps and bounds and now constitutes some of the most innovative research in economic history.

Bodenhorn is one of the leading practitioners of the "new financial history." State Banking, his latest book, is a combination of textbook and monograph. The goal is to provide a comprehensive portrait of the myriad ways in which Americans organized and operated banks before the Civil War.

Methodologically, the book makes extensive use of the modern economic theory of banking. According to this theory, banks have a comparative advantage in channeling capital away from uninformed investors toward higher value users. For this process to work efficiently, the incentives facing bankers must be carefully specified because, in banking, fraud is always lurking in the background. These incentives, in turn, may not be fully self-enforcing; in general, some regulation by the state will be necessary. One need only skim Chapter 2 ("Establishment and Government of the Antebellum Bank") and Chapter 3 ("Banking Theory and Banking Practice in Antebellum America") to realize that Bodenhorn has obviously read widely in the relevant literature. He possesses the rare ability not only to explain complicated economic ideas in straightforward prose but also to apply the models in insightful ways to historical settings.

The other half of cliometrics is econometrics; in this context, the book is more sparing in its sophistication. What there is in the way of statistics, however, is usually effective. A good example is Bodenhorn's demonstration of the close correspondence between the sectoral distribution of bank loans and the sectoral distribution of firms to establish the important role of banks in financing the working-capital requirements of early manufacturing (57-62).

Following the two "theory" chapters, the remainder of the book surveys regional variation in banking practices. Chapters 4 and 5, which focus on New England, provide extensive discussion about the so-called "Suffolk System." Chapters 6 through 8 describe banking arrangements in the Mid-Atlantic, including the origins of bank insurance in New York (the safety fund) and the somewhat misnamed experiment known as "free banking." Chapters 9 and 10 extend the story to the South and the frontier states. Chapter 11, in a somewhat sketchier manner, considers macroeconomic effects of banking before the Civil War.

Overall, State Banking succeeds admirably. Financial historians at the front lines may quibble at some of Bodenhorn's conclusions. For readers whose training is not in financial history (such as myself), the book is a superb resource.